tv Bloomberg Real Yield Bloomberg January 27, 2019 10:30am-11:00am EST
♪ taylor: from new york city for our viewers worldwide, i'm taylor riggs in for jonathan ferro. "bloomberg real yield" starts now. ♪ taylor: coming up, the bottom line at davos. the global economy is not on the brink of going bust, yet the risks are mounting. plus, the warning from guggenheim's scott minerd. the leverage loan market is likely to get worse. an economic slowdown in credit. two concerns for the fed's jay powell heading into next week's fomc meeting. we start with the big issue, uncertainty is in the air at davos. >> while people have certainly diminished their growth
expectations and you are hearing all about that at davos, we don't think they have done it enough. >> in 2019 i think the u.s. economy will grow at a lower rate than last year, and china will probably grow at a lower rate. >> although we have downgraded our forecast, the two countries that we have not downgraded are the u.s. and china. >> you have got a growth that kicked up to a higher level and is coming down a little bit. that makes people nervous. >> we see an economy that is absolutely slowing in terms of growth but not stalling by any means. by any means. >> uncertainty is generated -- is the greatest enemy of growth. >> the shutdown will ultimately start to affect economic activity. >> political uncertainty, it sort of doesn't make our job as business leaders easier. >> there is no question there
has been an economic cost paid by the u.k. consumer and u.k. industry because of this uncertainty has gone on so long. >> all eyes are on the trade talks, and hopefully in 90 days we hear some good news. >> i hope something positive will come out from the latest round. >> now you have all of this uncertainty and the possibility that the world is a lot slower than people expected last year. >> we are likely to see a weak first-quarter and a weak fourth quarter. i think the fed will pause. whether they resume will depend on better data coming through. taylor: joining me around the table in new york is noelle corum, the portfolio manager at invesco, and jose rasco, chief investment strategist at hsbc private bank americas. plus coming to us from london is iain stealey, international cio of fixed income at j.p. morgan asset management. iain, i want to start with you because in london you are sort
of bringing us the global european perspective here. talk to me in that sound bite we just had, a lot of concerns from davos about slowing growth. are those fears overdone? iain: i think there is definitely a concern because growth momentum across the world has come down, whether you look at what is going on in europe, japan downgrading their forecast, we have seen the slowing growth out of china. people are concerned about it and it's a big difference from where we were say a year ago. but the reality, i would agree with a lot of the comments we heard from davos, it is a slowdown. we are not going into contraction. we are not stalling, but just at a lower level of growth. but still positive. taylor: jose, you have been nodding your head. where do you see the biggest pockets of slowing growth? jose: in the u.s. and the government shutdown does not help. some of the advisors in the trump administration said the first quarter could be zero. we have had weak first quarters the whole business cycle. it could be abysmally weak in the first quarter but that would mean we see a pickup in q2. definitely slower growth in the u.s., risk of some slowing in china. we need to see a policy response
out of the chinese government. taylor: noelle, what do you make of slowing growth concerns, here in the u.s. as well, how are you playing that into your portfolio? noelle: we are thinking that the kind of u.s., which is stabilizing, they will continue to stabilize in q1 and q2 the first half of this year, but then if you look at europe, a lot of europe, what is weighing on growth is the external sector. with china being such a big trading partner and chinese growth slowing, we are focusing on china and what policymakers are doing there. that is the big question of 2019 is whether or not the policy is going to be effective enough to turn growth around and really bail out global growth altogether. and we think it will. taylor: iain, walk me through here. we just heard we may get some slowing growth in china, but as we are in the middle of earnings season in the u.s., everyone is pricing in slowing growth in china, but people are ignoring perhaps some of the slowing growth warnings that we have heard over in europe, even with, for example, mario draghi coming out pretty dovish after weak pmi's. are you preparing in your portfolio for a weaker than
expected slowing growth in europe? iain: i think most people are expecting and are ready for slowing growth in europe. when you look at where we have come since the late stage of 2017, when we were in this very buoyant environment, when europe was growing faster than the u.s., we have come off track pretty quickly. a lot of it has been down to china, the slowing of the emerging markets, europe is a big export engine. but the reality is, it means we get the slower growth, but you get the ecb unlikely to do anything in the form of tightening. if anything we expect them to be doing further easing for additional financing for the banks in the next few months or so. in that sense, there is a grab for yield going on in europe. even with the weaker pmi's we saw yesterday, we saw peripheral spreads tighten. which might be against expectations, but if you are in this lower for longer environment, then the yield, the pickup you can get in those markets is attractive. taylor: speaking of lower for longer, we have a chart showing the divergence in central bank action, with the u.s. has been pretty aggressive, i think we can call it aggressive, in
raising, where the ecb and boj have been pretty mostly unchanged. are there concerns now about peripheral europe, you know, if mario draghi cannot get off the bottom, and there is a slowdown? what else can he do? noelle: we think that, kind of agree with iain's view that he will come out dovish in march. he will continue to be dovish. the gdp numbers, expectations are going to have to be revised down. with the most recent meeting, he kind of just kicked the can to march. we think they are going to continue to be dovish, european growth is going to stabilize, and that will stabilize chinese growth. that is going to be a good environment for credit. taylor: we talked about slowing chinese growth, and you're also looking at a slowdown in the u.s. perhaps.
what is the impact on emerging markets? jose: i think if you look at emerging markets, in terms of markets, we have seen rates have stabilized. this slowdown has been priced into the bond market pretty well, especially at the long end. we have seen a very flat curve. so that, you know, that lowers interest rates. from our perspective, emerging markets look pretty compelling on the debt and equity side. so we like them. more importantly we still see pretty stable growth, as you alluded to. i think this year, good growth in em. the question for us is really the currency play. at some point when the dollar peaks -- we saw it in 2016, the dollar peaked in december and the next two years -- the next year rather, we saw emerging
markets do well. noelle: i was going to say, just hitting that point home with stable growth and a fed that will remain cautious, at least in the near term, that is a very good environment for credit, especially assets, you know, that are higher-yielding. valuations, especially high-yield leveraged loans have come in a lot. but we still think they are very attractive yields here. taylor: that is our next segment. [speaking simultaneously] jose: if you look at what the market is telling you, we have already seen $5 billion flow into em in the first two weeks of the year, so the market is pricing in a better environment for em relative to the developed world. taylor: iain, jump in here on em. i just got off the phone with the pimco portfolio manager, he is liking perhaps local currency debt versus dollar-denominated.
as we talk about em, what do you like? iain: i would agree with that. when you think over the course of last year, we had this exceptional data out of the u.s. relative to the rest of the world, the dollar continued to strengthen. em got pretty well hit through the first half of the year. now we are in an environment where the fed is a bit more patient, where we are hearing rumors or talk about them not slowing down the balance sheet reduction. that is likely to put a cap on the dollar. some of that underperformance we saw in em over the last year can be reversed, and actually i say those yields still look pretty attractive out there. if you look at the em index at the moment, 6.5%. that looks good. and i think people will start buying into that. you just mentioned, the flows are showing that for early this year. taylor: well, iain, bringing it full circle and coming back to the fed, which is where we started with global growth and the fed. where in the u.s. bond markets, treasuries or corporate, is your sweet spot as we look at a flattening yield curve? iain: i would go with, i would go with a high-yield market. the spreads have come in a long way this year, but obviously they widen significantly at the back end of last year. when we look forward and we talked to our analysts, expectations for default, somewhere in the 2% region. if you have a 4.5% spread them of the fed not going anywhere, we think on a default adjusted basis, you are compensated to take that risk. maybe you are not going to get double-digit returns, but you could get single-digit returns in that environment this year. taylor: with a flattening yield curve, where is your sweet spot in terms of duration?
noelle: mainly in the front end. we like u.s. ig, we like the asia ig, and that is largely on stable growth and stabilizing growth in china over the long-term. and that, i think there is room for high-yield loans in our portfolio but right now we like ig. taylor: perfect tease for the next segment. of course everyone is sticking with me. noelle corum from invesco, jose rasco and iain stealey. and coming up, the auction block. high-yield is heating up and spain gets record orders for its offerings. this is "bloomberg real yield." ♪
auction block, where that drought in high-yield is over. a top headline this week saw the most u.s. junk-bond issuance since early august. it sold bonds to refinance some of its money $21 billion debt load in an upside deal. meanwhile in europe, ibm helped to wake europe's slumbering corporate bond market. the region's biggest sales since march. the company sold its largest eurobond deal ever. and spain got record orders, about $53 billion in the 10-year sovereign bond sale. investors clamoring for that extra yield by periphery euro area debt. while i am at the desk in new york this week, of course, jonathan ferro, he was out with tom keene at the world economic forum in davos, switzerland. they caught up with guggenheim's cio scott minard to ask him about the leveraged loan market in 2019. scott: i think it gets even worse. when you look at last year and you see the incremental issuance of new leveraged loans versus
the incremental issuance of clo's, they basically, all the new incremental supply of loans, clo's, those people in many cases have sold the risk away. so all they are looking for is to get the assets so they can charge -- tom: you said there was a 2007, 2008 memory. they sold the risk away. are you suggesting we will fold ourselves into another 2008, 2009 set of events, nonsequential, nonlinear events, like we did then? scott: i think so. hopefully it will not be as extreme, but let's be careful. relative to the subprime market, the clo market is much smaller, and it is largely held -- tom: there is no aig out there. scott: that's right. i do think the price gaps are going to be just as nauseating
as they were in the 2008 experience. taylor: still with me is noelle corum from invesco, jose rasco from hsbc private bank americas, and iain stealey from jpmorgan asset management. jose, you heard it, leveraged loans may be expected to get worse this year, but nothing like we saw in 2008. do you agree with mr. minard? jose: i think we could do some issues. you are basically seeing a rising rate environment in the u.s. that said, we think the fed will be on pause through the first half of the year. this is a year of deleveraging, corporate deleveraging in the u.s., that is one point. don't forget the other big debtor around the world, one of them is china. we are seeing a great deal of deleveraging there as well. the big story from our perspective is we like high-yield because we think the yields are attractive relative
to the risk. and we think it is a risk on year because growth will pick up through the year. taylor: right. noelle, you are the high-yield queen. jump in here. what do you think of leveraged loans? noelle: we like leveraged loans here relative to high-yield, both the valuations are little bit richer in high-yield. leveraged loans though in december, you saw them get hit so hard that the spread levels were actually consistent with defaults of over 6%. when really defaults we are seeing is 1.5%, 1.6%. we just think that the moves were too far and markets are waking up in 2019 to fundamentals that are relatively healthy. as jose said, we also expect stabilizing growth in the u.s. and globally as we move through the year. that will support loans. taylor: iain, jump in here. so much of the concern about leveraged loans is that they took a big downturn in december and then run up. they are up about 2.6% year to date. has the recovery of leveraged loans been too far, too fast?
iain: no, i don't think so. what you saw, you saw all assets. there was an oversold environment through december, we got through the liquidity gap in the holiday period. whether you looked at the stock market, high yield, leverage loan market, everything oversold too much. what we are seeing is there is a recovery that is also being buoyed by what is being said by the fed, better tone regarding trade, stimulus out of china. you can understand why we have seen the bounce-back we have seen this year. taylor: well iain, within high-yield, i wonder what is your sweet spot? you talked a lot about the bbb's, which are investment grade. some of the riskier debt outperforming within high-yield, can you differentiate between a bb or a ccc? iain: i think definitely you can. ccc are the weaker credits. if we do go through a slow down, that is where you will likely see the defaults occur. i would agree though with what we have said, as growth stabilizes with the fed on pause, you have got default rates, the forward expectation
is they will be ok and you'll be compensated to own the high-yield market at the moment. i definitely think as we get towards the end of the cycle, we think we are late cycle, we do not think we are end cycle, but as you get toward the end of the cycle, you want to avoid the real ccc, the real lowest quality parts of the market. taylor: do you agree with that, sort of avoiding the ccc in the late cycle part of the market? noelle: we agree. we still like bbb's. the performance has recovered kind of the weakness in december. but at the end of the day, interest covered ratios are over five and ebita margins continue to be supportive. we think there are companies that are showing that they are determined and willing to pay down debt, if growth slows, or if the fed continues to hike. that is kind of where we are positioning.
taylor: interestingly enough, we have been talking about high-yield, but it's actually been the bbb's, investment grades are outperforming everyone. jose: one thing i wanted to say, if you look at sectors, for example, energy sold off a lot in december due to lower oil prices. we have got a stabilizing economy globally. for the balance of the year that is a sector that could surprise to the upside because we could see some better performance of oil prices go up in particular. taylor: surprise to the upside. everyone is sticking with me. noelle corum from invesco, jose rasco from hsbc private bank americas, and iain stealey from jpmorgan asset management. let's get a check on where the bond markets have been this week. yields coming down across the curve on a weekly basis. two-year, 2.59. 10 year, 2.75. and 30-year at 3.06. not yet touching the key three handle. and still ahead, the final spread, the week ahead features u.s.-china trade talks, the fomc meeting, and the u.s. jobs report. this is "bloomberg real yield." ♪
taylor: i'm taylor riggs. this is "bloomberg real yield." time for the final spread. coming up over the next week, there will be another round of earnings, plus we will get comments from the fed's jay powell and ecb's mario draghi. of course don't forget there will be u.s.-china trade talks, brexit vote in the you take, the u.s. jobs report. still with me, noelle corum, jose rasco, and iain stealey from jpmorgan asset management. we mentioned the fed coming up next week in the u.s. jobs report and the shutdown, does any of that change your scenario for jay powell? jose: no. we think jay powell is on hold until september. one thing the market should be vigilant of is the seasonal factors in the first quarter are just askew in this business cycle. keep in mind minimum wages went up in a lot of states this year, just like they did last year. do not be surprised by a bit of a jump in wages on the employment report free of it may not be shocked by that. i think the market would not
take it well, but i don't think it holds. taylor: noelle, jobs report, the fed, does anything change? noelle: i think the fed goes in june, and that is largely on the growth and inflation picture kind of stabilizing from here. in terms of next week, not much is going to change from the rhetoric we have seen earlier this month. as we get into march, that will be a little more interesting because nothing is -- barely anything is priced in for 2019 in terms of hikes. we will get to the scenario where growth and inflation is supportive, but the market is not. the fed is going to have to start to shift their rhetoric a little bit. that will be interesting. taylor: iain, jump in here. does anything change for you? are we sort of on pause again with the fed until march, nothing about the employment report can move the fed's timeline at least until march? iain: january is a fed meeting, and we are going to have a press
conference. i think that will make things interesting. all eyes will be on that. if you think back to december and the uncertainty markets had, it was when jay powell came out and sort of stopped any thoughts of balance sheet reduction. the market didn't particularly like that. they wanted more flexibility from the fed. since then we have had more change in tone, it looks like the fed are debating balance sheet reductions. any noise around that, any discussions around that can be positive for markets if it does come out. taylor: iain, we mentioned it is earnings season here as well. i wanted your thoughts on corporate profits. are companies still healthy in terms of paying down debt, any commentary around earnings that has changed your view on the health of companies? iain: i don't think so. earnings are looking ok at the moment. the u.s. economy is going to slow, but it is not going to go into contraction. we are just going into a trend like growth. we had a sugar rush from the tax
reform last year, now coming down to normal growth and more stabilized there, and the u.s. economy will just move forward. taylor: corporate profits, how are you able to play that in your portfolio? noelle: right now we like banks. that is the only major sector in terms of what has been announced so far in terms of earnings that has really come through. and we think so far, there has been surprise to the upside relative to what was expected. banks are well-positioned for a growth slowdown from here. taylor: ok, time for our rapid fire round. this is my first. i am very excited. first one, u.s. shutdown or brexit. what matters more? iain, go first. iain: i have got to with brexit. i am over here. jose: u.s. shutdown. noelle: brexit. taylor: ok, two for one. leveraged loan performance, the big run-up we had in january, a predictor for the rest of the year? iain? iain: yes. jose: yes. noelle: yes. taylor: ok.
finally do bbb's continue to be the outperformer in the investment grade market? iain: yes. jose: i would say no. noelle: i would say yes. taylor: two out of three. thank you. noelle corum from invesco, jose rasco from hsbc private bank americas, and iain stealey from jpmorgan asset management. from new york, that does it for us. we will see you next friday at 1:00 p.m. new york time, 6:00 in london. this is bloomberg. ♪
♪ alix: trump challenges maduro. president donald trump calls the maduro regime illegitimate and recognizes the opposition leader and waives u.s. oil sanctions while nicolas maduro faces violent protests. saudi arabia's lng bet for the future. we sit down with the saudi aramco ceo. trade war bite. a company prepares to take a hit of $100 billion. the u.s. and china trade battle drags down soybean prices. competitor cargill weighs in. ♪ i am alix steel. welcome to "bloomberg commoditi